Market forces and externalities in tobacco industry regulation

¶ … trick-or-treating on Halloween unsupervised with my friends for the first time. I came back with the usual pillowcase full of candy, which my parents immediately appropriated, looking for apples with razor blades, drug-laced baked goods or any other of the dangers the media scared them about that year. One of the treats that was taken away was a red and white, cellophane-wrapped box I hadn't really paid attention to and so didn't really miss. My friend's pack however, had slipped under the parental radar, and the next day we stood around pretending to smoke our candy cigarettes in front of the mirror like movie stars. It was fun. We looked cool, like the high-school kids.

Demonstrate Existence Of A Problem

Is tobacco use a problem? One AP writer argues early death by smokers saves us all money (Werner 2009). Congress seems to think smoking is a problem, if the scathing language in Section 2 ("Findings") of the Family Smoking Prevention and Control Act (2009) is true. I argue we should use market forces to encourage production of other products besides tobacco, because of externalities, or costs to public health not paid for directly by tobacco consumers or producers. While the total social cost of the problem is probably more than all of us expect if we consider how this money could be invested in more socially profitable output, this is enough to demonstrate the existence of a problem we can document and analyze in a number of ways. Likewise the black market for tobacco products is real, even if more of a problem outside the U.S. As yet (World Health Organization 2004, p. 16). These will become a component of our solutions below.

Criteria Defining Scope of Possible Solutions

Solutions must be viable and fair. Viability includes several required and measurable criteria. Solutions must be cost effective, measured in dollars, i.e. 'revenue neutral' or better, and enforceable. This implies they must be legal. Fairness is defined as treating people the same under law. This usually involves the Supreme Court, so we can measure rulings, sometimes also by their economic effects. This may be a requirement of the viability criterion 'legality,' i.e. viability may include the fairness category. This does not preclude implementation. We can define fairness as not discriminating between groups of individuals from examples like the Civil Rights Act or the Constitution. If unfair, the Courts will overrule solutions that get through Congress, which will be the unit of fairness measurement, yes or no. This is not an innovation but how new laws are normally made.

Possible Solutions that Satisfy Criteria; Research Supports the Best Solution

Outright tobacco prohibition may not satisfy viability criteria, as suggested by the U.S. experience with alcohol and illegal drug prohibition. One of the main lessons we learned from the U.S. Prohibition experiment was that enforceability was expensive and difficult, apparently impossible given the resources at the time. The persistence of a modern black market for marijuana, and apparently tobacco, both by organized crime and through sales to minors (World Health Organization, 2004, p. 16), support an argument that prohibition of tobacco would just expand existing black markets for that as well, especially considering products' physical similarity and a history of tobacco smuggling that predates the United States (Smith, 1937, p. 157).

Simply increasing taxes on these products at the cash register the way we do now reduces consumption (Ong, 2011, slide 16) but violates the fairness and viability criteria in that such taxes are regressive if smokers don't quit. Ong argues higher-income smokers pay more share of the absolute value of tobacco tax based on the assumption that they buy more expensive brands and also that more low-income smokers quit (2011); I consider a different measurement, share of total income, and reject point of sales tax increases as violating both super- and subordinate criteria. If lower-income consumers can't quit smoking after tax increases, then point of sale tax represents a higher percentage of their incomes than would taxing the profits and equity shareholders enjoy, who must have enough savings to invest in tobacco company stocks in the first place. Increasing point-of-sales taxes may also stimulate avoidance, i.e. smuggling (Farrelly, Nimsch and James, 2003 p. 6), and thus violate revenue neutrality by raising enforcement costs.

In fact the marijuana prohibition experience provides a valuable modern analogy but also a potential revenue stream, were that tax expense freed up through decriminalization. If marijuana was regulated the same way as tobacco is now, the tax revenue and enforcement savings could be transferred to covering tobacco health care costs, increasing fairness for insurance and medical consumers who don't smoke either one. On the other hand, states that have decriminalized medical marijuana also serve as a precedent for tobacco licensing programs, because if we can permit and regulate marijuana production as a growing number of examples demonstrate, we could likely regulate tobacco the same way. The two parallels demonstrate perfectly symmetrical solutions in that one is illegal and regulated, and the other is legal but less (medically) regulated than the illegal one.

Marijuana licensure requires medical treatment, which would satisfy the enforceability criterion for tobacco cessation programs and enforcement, cutting down the public health care cost even more. If people were caught furnishing tobacco to unlicensed consumers, they could be punished the exact same way illegal medical marijuana sales are now, with the cost borne by those who commit the crime, i.e. revenue neutral in theory. Tobacco licensure could help equalize its social cost the same we attempt to internalize carbon emissions through cap-and-trade programs for industrial polluters, with the goal to be pushing costs back onto those who profit from them under identical justifications. The revenue could even be used to subsidize transition to other commodities by erstwhile tobacco producers over a finite period, with retraining for workers displaced from a shrinking tobacco industry.

The savings to consumers would stimulate employment and savings the same way returns to tobacco investors do now. These returns to investors represent a leakage, if increased health care costs paid by all consumers and taxpayers generate profit for those with enough savings to invest in tobacco company stocks. This is a revenue stream that to my knowledge goes untaxed separately from other sources of income. The real solution to the fairness problem is to break this transfer cycle to the investors, from the low-income tobacco consumer, from indigent care paid by the entire health care consumer sector, and then ultimately from the taxpayer. The same applies to alcohol profits where indigent drunk drivers cannot pay for the damage they cause at the cost of the general public, instead of those who derive revenue from sales that don't include the cost of their consequences, alcohol producers' shareholders.

The goal of this would be to make tobacco production less profitable for investors so they would shift to different investments. If they didn't, it would imply they were spending money creating harmful products (pollution) for reasons other than profit. Are there any other reasons for harming everyone else? We could also capture these profits by taxing the 150 million or so cigarettes exported per year from the U.S. (World.Health.Organization. 2004 Table B.) more heavily, which would undermine the revenue supporting American distribution so investors would look elsewhere, and producers would follow their investment dollars.

The best solution would be to place products that create public cost (pollution) into a class of goods where those costs were paid by those who profit from them instead of the general population. Since almost all products carry some type of public effects if only exhaust, traffic congestion or gas price competition from their distribution, there would have to be a pollution threshold over which some goods would qualify. Regulating and taxing tobacco, alcohol and perhaps but not necessarily marijuana as substances that have medical consequences of addiction or cardiovascular or liver disease, would allow us to cover social cost not paid for directly by consumers at the cash register.

Implementing the solution into society

The 111th Congress took a first step placing tobacco under the FDA's regulation with the Family Smoking Prevention and Control Act (2009), in scathing language Congress never had the integrity to declare until now. We would have to take the final step of removing section 906 (d) prohibiting the Secretary of the FDA from requiring doctors' prescription. Most of my solutions above would require legal change that is often blocked by expensive lobbying on part of the tobacco industry. Tobacco lobbying company Altria Client Services and its Affiliates spent about $2 million in "Payments to Influence" California state lawmakers over the 2009-2010 session alone (Bowen, Debra n. pag.). The irony is that this expense would also be freed up for producers if this type of lobbying were prohibited somehow, and underwrite converting to other production than tobacco, or to pay dividends that would be taxed as income. Getting Tobacco out of the state house might ultimately require a benchmark measured in election returns.

What this would take would be achieving parity between alcohol, tobacco and marijuana in a regulatory sense. Taking marijuana off the Federal drug schedule (I) for licensed users, or putting tobacco on the schedule as a controlled substance, would achieve the same results. Since marijuana has begun to be decriminalized in many of our largest states under the rhetoric that it may have medical benefits, this does not seem implausible considering that smoking is a "health crisis" (U.S. Congress 2009); if alcohol has benefits, those are only in moderate doses (U.S. National Institutes of Health, 2000, p. 6). The policy and attitude change this would require would cost little to implement, but the effects would have far-ranging socio-economic benefits. The social cost already exists and we can measure it, in the millions of lives lost and dollars spent over our experience with legal tobacco and alcohol compared to other controlled substances.

This would require shifting one component of the War On Drugs to another. Spending could be the same, but enforcement resources could be concentrated on the rest of other crimes (King and Mauer, 2006, n. pag). We could shift the spending to DUI enforcement for example and achieve direct savings in public health cost and human life. One complication would be justifying all our past harm and expense incarcerating violators before marijuana prohibition had been revoked. But perpetuating this cost on grounds that we can't stop now without admitting we made a mistake, would be throwing good money after bad, on the same grounds that we can't admit tobacco use causes morbidity because we then would have to admit to damages we have been allowing all this time. That way lies the real slippery slope, that we have to keep making past mistakes or else admit we are learning from them.

I have argued that tobacco should be administered as a drug; profits from tobacco production including growing and not just manufacture should be taxed, and the revenue spent cutting public health costs for all consumers and taxpayers from indigent cost shift caused by tobacco morbidity. The goal would be to induce them to produce more profitable output or pay for the public costs they create generating profit for shareholders. Candy cigarettes should be seriously considered as to their intent and purpose, because perhaps there are products the 14th amendment does not apply to just like the First Amendment does not apply to prohibited speech. But don't worry kiddies! There's always Big League Chew bubble gum. You know, the kind with the cartoon baseball pitcher on the front.